Symonds Bendigo Division purchases from an outside supplier for $52 per unit. The company's Ballarat Division, which has no excess capacity, makes and sells the same part for external customers at a variable cost of $38 and a selling price of $58. If Ballarat commences sales to Bendigo it will (1) use the general rule and (2) be able to reduce the variable cost on internal transfers by $4. If external sales are not affected, Ballarat should establish a transfer price of:
A) $34
B) $38
C) $54
D) $58

Question

Quizplus · Accepted Answer

If Ballarat uses the general rule, it would set the transfer price at its variable cost plus a markup for forgone external sales. The variable cost of producing the part in Ballarat is $38, and the markup would be the difference between the selling price to external customers ($58) and the variable cost ($38), which is $20. So the transfer price would be $38+$20 = $58.

However, if Ballarat can reduce the variable cost on internal transfers by $4, then the transfer price should be set at the variable cost plus the reduced markup. The variable cost of producing the part is still $38, but the reduced markup would now be $16 ($20-$4). So the transfer price would be $38+$16 = $54.

Therefore, the best choice is C ($54).

Symonds Bendigo Division Purchases from an Outside Supplier for $52